The SeniorCare Investor: Seniors Housing Legal Woes--
Lenders And Owners Face Off In Court Battles
Although everyone has heard the old phrase, “It’s not nice to fool Mother Nature,” at least Mother Nature does not use the U.S. court system to settle her disputes. In a recent court filing, which could be called, “It’s not nice to fool your creditors,” the Liquidating Creditor Trustee of Erickson Retirement Communities, LLC (ERC) is not very happy and filed a complaint in early June seeking to recoup more than $100 million from the founder of ERC, John Erickson, his wife, his sons, former senior executives and board members (24 people in all), plus various Erickson family trusts.
The complaint alleges that ERC and its affiliates were basically insolvent since at least 2003, and that instead of restructuring the undercapitalized companies at the time, management and the board “burdened the companies with even more debt and continued to operate the insolvent companies for the benefit of John Erickson and his family” and kept them in business “just long enough to mortgage their assets and/or transfer them to insiders until the companies were forced to seek bankruptcy protection.” Talk about a bombshell.
Acknowledging that we are not forensic accountants, one of the reasons why the trustee claims the company was “insolvent” was because according to the 2003 financial statements, the negative equity of ERC was $74.8 million, and grew to a negative $334.4 million by September 30, 2009. The problem is that a negative “book equity” doesn’t necessarily mean anything from an operating solvency basis. It does mean that the company racked up a few hundred million dollars of losses, and while not a goal that anyone would strive for, it is not uncommon for real estate entities that are in a high-growth mode, which ERC certainly was from 2003 until its bankruptcy filing.
Most of the complaint revolves around the use of corporate funds to finance the personal interests of the Erickson family, including an expensive house, a yacht and a condo, as well as a $55.8 million loan from Erickson Group (whose basic asset was ERC) to two family trusts to buy out a minority interest partner (Baltimore Community Foundation) in Erickson Group. But since Erickson Group didn’t have the funds, it “borrowed” the money from ERC, and said loan was approved by ERC’s board and officers, according to the complaint. In addition, the complaint mentions various transfers, ranging from $587,000 to $4.57 million from August 2007 to December 2009, to employees, former employees and family members at a time when the company was “insolvent.”
There is a lot of other dirty laundry which is not worth mentioning, but how much merit there is to any of these claims is anyone’s guess, and the trustee could just be fishing to recover anything he can on behalf of the creditors, which is, after all, his job. The one lesson to be learned from this, however, is that once a family business starts to borrow hundreds of millions of dollars, the business can no longer be the family financial playground it may have been where funds are transferred between and among family members and their various interests willy-nilly...Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today